The Deutsche Bundesbank hosted its third Cash Conference from 25-27 April, gathering experts – from academia, public authorities (including central banks), special interest groups and the private sector.
The aim is to improve the understanding of cash payment economics based on recent academic research in general and, more specically, to help identify possible developments and dynamics that will shape the future cash payments landscape. In this regard the on-going debate about restriction of cash payments played a pivotal role.
Shift in War on Cash
Carl-Ludwig Thiele, member of the Board of the Bundesbank opened the debates, declaring that the war on cash had shifted from an economic debate into a public one as opponents of cash are increasingly calling for limitations on its usage and its abolishment.
The keynote session pitted Peter Sands, former Head of Standard Chartered Bank and senior fellow at Harvard, and author of the paper ‘Making it Harder for the
Bad Guys: The Case for Eliminating High Denomination Notes’ against Friedrich Schneider, Professor of Economics at the Johannes Kepler University and a globally recognised expert on the shadow economy.
Sands surprised the audience by stating that ‘cash is one of mankind’s most brilliant inventions’. But he promptly added that cash is ‘the favourite payment mechanism of those who do not abide by the law.’ Therefore, cash facilitates crime, tax evasion and corruption. It also prevents central banks from diving deeper into negative interest rates, as citizens would transfer their bank accounts into banknotes.
To minimise the ‘dark side’ of cash, Sands recommends that central banks withdraw high denomination notes – but he does not define what is a high denomination – and that thresholds be imposed on cash payments.
Schneider responded by saying that numerous studies show that cash is heavily used in the legal economy. He added ‘figures on crime and criminal cash usage are rare, often riddled with errors and are difficult to interpret.’ The introduction of cash limits would only have a marginal impact on the size of the shadow economy.
The two opponents agreed on one point: very little research is available on the topic of cash and only a limited share of central bank resources are devoted to cash research.
New perspectives on demand
Several presentations provided new perspectives on the components of cash demand. Emanuelle Politronacci from the Banque de France offered a new approach to modelling national demand for banknotes in the euro area. Nikolaus Bartzsch estimated the volume of €20 banknotes that are held for transactional purposes, both in Germany and outside the euro area, following the introduction of the new Europa series.
Martina Eschelbach from the Deutsche Bundesbank demonstrated that cash has a disciplinary effect and protects consumers from unnecessary spending. She concluded that ‘the probability of an unplanned purchase subsequently being considered unnecessary is around 10% lower when paid in cash.’ She added that restricting the use of cash ‘will also reduce consumer’s welfare by depriving them of a means of encouraging budget discipline.’
Helmut Stix, from the Oesterreichische Nationalbank (OeNB), analysed the evolution of cash demand globally since the Global Financial Crisis (GFC). He observed that the majority of currencies had seen an increase in relation GDP since the GFC. The usual drivers – foreign demand, domestic demand, low interest rates – do not entirely explain this growth. For Stix, the additional demand is due to a confidence effect and increased uncertainty. Friedman and Schwartz had established the relation between cash demand and uncertainty in 1964: ‘The more uncertain the future, the greater the value of [the] flexibility [of cash] and hence the greater the demand for [it] is likely to be.’
Stefan Augustin, also from OeNB, provided an overview of the Austrian cash cycle. Payment surveys show that 81.8% of transaction volumes and 65% in value are settled in cash. Cash is widely used in Austria, including for high-value transactions: 47.2% of transactions over €100 are paid in cash. Because of growing demand, the OENB has introduced new technology, including new generation sorters, as well as G&D’s Nota Tracc module to increase productivity.
In the Netherlands on the other hand, payment surveys have shown a gradual substitution of cash by debit card payments between 2010 and 2016, as demonstrated by Nicole Jonker of De Nederlandsche Bank. In 2015, Dutch consumers made more payments with debit cards than with cash, for the first time.
Policy response to declining usage
Bram Scholten, also from De Nederlandsche Bank, proposed a policy response to manage declining cash usage in countries such as the Netherlands and the Nordics. Both the Netherlands and Norway have adopted a pro-active approach; Norway has opted for a legislative route to ensure the availability of cash deposits and withdrawals. In the Netherlands, the key stakeholders in the cash cycle have agreed on a co-operative model and have established non-binding guidelines to ensure the acceptance and availability of cash.
Hayley Campbell from the Royal United Services Institute in the UK and Ben Weisman from the Harvard Business School in the US recommended that the EU should pursue the introduction of a uniform cash threshold, at least within the euro area. But they recognised that this would have only a marginal impact on the financing of terrorism; however, the fight against terrorism is the main objective on the on-going EU initiative on restrictions on payments in cash.
The ‘blessing’ of cash
Franz Seitz and Manfred Krueger delivered the concluding presentation, aptly titled ‘The blessing of cash’. They observed that while most countries are seeing a decline in the transactional role of cash, the other motives of cash holdings are strengthening. They stressed that the elimination of cash would raise serious anti-trust and governance issues in Europe, where many national card schemes have been discontinued to the benefit of Visa and Mastercard.
As for those who recommend abolishing cash so as to introduce negative interest rates, the welfare costs associated with negative interest rates are considerable; an interest rate of -3% creates a welfare loss of around €24 billion per year.